IB Economics/Macroeconomics/Macroeconomic Models

Aggregate demand- components: Aggregate demand is composed of four parts.

Consumption: How much households demand.

Investment: How much firms demand.

Government: How much Governments demand.

[Exports- Imports]: How many exports are demanded from a country minus the number of imports said country demands.

This all makes for a very elegant equation: Aggregate demand= C+I+G+[X-M]

Aggregate supply: Aggregate supply is national output which is equal to national income.

Short run: In the short run demand and supply are the same.

Long-run (Keynesian versus neo-classical approach): There are two different examples of long-run supply curves. Keynesians believe that the long-run supply curve is a flipped L shaped. That we are never reaching an economy's full capacity and working towards it. Neo-classicals believe that this is not the case, and the supply curve is in fact- perfectly inelastic.

Full employment level of national income:means the level of total output

attained when unemployment is at a socially acceptable level. In most cases this is around 5%, however it does tend to vary.